High-Net-Worth Individuals (HNWIs): Criteria and Investments
Step into the exclusive world of the elite – where private jets, designer wardrobes, and fine art are just another day in the life of high-net-worth individuals. But what exactly makes someone an HNWI, and how do they manage their finances to maintain their lavish lifestyle?
What is a High-Net-Worth Individual (HNWI)?
A high-net-worth individual is one with liquid assets of at least $1 million. The threshold generally uses liquid assets only — money held in bank accounts or brokerages — excluding assets like a primary residence, collectibles or durable goods.
This term refers to a financial services industry classification commonly used by wealth management companies and financial advisors to target potential clients with significant wealth to invest.
The exact definition of what constitutes a high net worth individual may vary depending on the source, but in general, these individuals are seen as having a substantial financial portfolio and a high level of investment sophistication.
The closest thing to a standardized definition of an HNWI comes from the Securities and Exchange Commission (SEC), which defines an HNWI as someone with a net worth of at least $1.5 million or $750,000 in investable assets.
Types of High-Net-Worth Individuals
- Very-high-net-worth individuals (VHNWIs): People or households who hold liquid assets valued between $5 million and $30 million
- Ultra-high-net-worth individuals (UHNWIs): People or households who own more than $30 million in liquid assets.
- Accredited Investors: The SEC defines most HNWIs as “accredited investors,” which provides them access to special securities, such as private equity and hedge funds.
Financial advisors are required to report how many clients they have who meet the SEC’s HNWI definition and accredited investor definition.
About High-Net-Worth Individuals
According to the Capgemini World Wealth Report, the U.S. is home to the most HNWIs in the world — 7.5 million in 2021, up 13.5% from the year prior.
Capgemini separates the HNWI population into three wealth bands:
- Millionaires next door: $1 million – $5 million in investable assets
- Mid-Tier Millionaires: $5 million to $30 million
- Ultra-HNWIs: Those with more than $30 million
HNWIs are defined by their high net worth and investment portfolios, which often include a variety of assets such as stocks, bonds, real estate, and other forms of alternative investments.
They are also typically financially sophisticated, with a strong understanding of investment principles and a track record of successful investments.
In addition, HNWIs typically have high incomes and a tendency to spend money on luxury goods and experiences.
Wealth Management for HNWIs
HNWIs require specialized wealth management services to protect and preserve their wealth over time, which is why many financial institutions have a separate arm just for high or ultra-high-net-worth clients called private banks.
Financial institutions offer a range of wealth management services specifically designed for HNWIs, including investment advice, portfolio management and estate planning. A financial planner plays a critical role in providing HNWIs with professional advice and guidance on how best to manage their wealth.
Investment Strategies for HNWIs
HNWIs often invest in diverse assets to minimize risk and maximize returns. This includes diversifying investments across different asset classes and geographic regions, as well as investing in alternative assets such as real estate, private equity and Contemporary Art.
Many HNWIs also use luxury collectibles both as investments and as status symbols — for example, hanging a Picasso or housing a luxury wine collection can both provide ample returns and display their luxury lifestyle.
HNWIs also consider the liquidity and stability of investments and the potential for long-term growth.
Estate Planning for HNWIs
Estate planning is a crucial matter for High Net Worth Individuals (HNWIs) as it secures the preservation and transfer of wealth to future generations. To minimize taxes and safeguard assets, HNWIs can implement estate planning strategies such as utilizing trusts, drafting wills, and employing other relevant legal documents. Furthermore, estate planning enables HNWIs to allocate their wealth toward supporting charitable organizations and causes that hold significance to them.
How to Calculate Net Worth
Net worth is calculated by subtracting total liabilities from total assets. In other words, net worth is the value of everything you own (your assets) minus what you owe (your liabilities).
Here’s the formula to calculate net worth:
Net worth = Total assets – Total liabilities
To calculate your net worth, you need to know the value of all your assets, including:
- Cash and savings accounts
- Investment accounts (stocks, bonds, mutual funds, etc.)
- Retirement accounts (401(k), IRA, etc.)
- Real estate (primary residence and any other properties)
- Personal property (cars, jewelry, artwork, etc.)
Next, you need to add up all your liabilities, which include:
- Car loans
- Credit card debt
- Student loans
- Any other loans or debts you may have
Once you have calculated the value of your assets and liabilities, subtract your liabilities from your assets to determine your net worth. This number can then be used to track your financial progress over time and help you determine your overall financial health.
It’s important to note that calculating net worth can be an estimate and may not always reflect the exact value of your assets and liabilities. Additionally, the value of assets like real estate and personal property can be difficult to determine without a professional appraisal.
Benefits of High Net Worth (HNW)
As a high-net-worth individual, you can typically enjoy certain perks in financial institutions similar to those of frequent flyers in the airline industry.
Financial service providers offer “white glove” treatment and customized services to HNWIs, which include access to dedicated wealth managers and estate planning services, invitations to exclusive conferences and events, lower fees on financial services, and preferential access to advisors during extended hours.
High-net-worth individuals are highly sought after by private wealth managers. Managing and preserving wealth becomes more complex as a person’s financial assets increase, and these individuals typically demand and can afford customized services in areas such as investment management, estate planning, tax planning and more.
Moreover, HNWIs may be eligible to participate in investments that are not accessible to the general public, such as hedge funds and private equity. They may also be offered the chance to invest in initial public offerings (IPOs) at the early stages. These investment opportunities are not typically available to ordinary investors and provide HNWIs with unique opportunities to grow their wealth.
Invest like High-Net-Worth Individuals
Contemporary Art can help with portfolio diversification because it has a very low correlation with traditional markets. This means during bear markets or periods of high inflation, blue-chip Contemporary Art has historically outpaced the traditional market, providing a hedge for your portfolio (MW All Art Index).
In 2021, UBS reported that art as an asset class had an annual transaction volume of $65.1 billion and a total estimated global value of $1.7 trillion.
According to the Masterworks All Art Index, Contemporary Art prices appreciated by about 20.3% during high inflation — making it one of the best inflation hedge assets. Contemporary Art has also shown strong price appreciation, increasing on average 13.8% over the past 26 years.
- Read More: Has High Inflation Impacted the Art Market?
However, it can be difficult for an individual investor to invest in a piece of a $15 million painting because of the high cost, storage and insurance requirements and needing in-depth knowledge of the art market and different artists.
Your Masterworks account allows you to invest a piece of a $10 million painting for a fraction of the cost.
The Bottom Line
HNWIs play a significant role in the financial world and require specialized wealth management services to ensure their wealth is protected and preserved over time. With a strong understanding of investment principles and a diversified investment portfolio, HNWIs can maximize returns and minimize risk.
Estate planning is also an important consideration, as it helps ensure that wealth is protected and passed down to future generations. By working with a financial or investment adviser, HNWIs can make informed decisions about their wealth and achieve their long-term financial goals.
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